Recessionary Gap (or deflationary gap) occurs when aggregate demand falls below full-employment level, causing involuntary unemployment and idle capacity. Definition: Difference between full-employment income and actual income; represents underutilized economy. Characteristics: Unemployment above natural rate, idle production capacity, depressed prices/wages (sticky downward), falling business confidence. Causes: Demand shocks (consumer pessimism, investment decline), Monetary contraction (reduced money supply), International factors (export decline). Effects: Rising unemployment, lower incomes, reduced government revenue, poverty increases, deflation possible. Policy response: Expansionary fiscal policy (increased spending, tax cuts), Expansionary monetary policy (lower rates, increase money supply), Supply-side policies (reduce costs, increase efficiency). Inflationary Gap (opposite): When aggregate demand exceeds full-employment output, causing inflation and overutilization. Definition: Positive difference showing demand excess, economy "overheating." Characteristics: Unemployment below natural rate, resource scarcity, rising prices/wages, overconfidence. Policy response: Contractionary fiscal policy (reduce spending), Contractionary monetary policy (raise rates). Indian context: 2008 crisis created recessionary gap, requiring stimulus response. ICAI focus: Identifying gaps, understanding causes and policy responses. Exam tip: Recessionary gap requires expansionary policy; inflationary gap requires contractionary policy (opposite directions).